I’m often asked what are some of the characteristics I see in successful dairy operations. From my 27 years as a consultant, I’ve compiled the following list of the most important traits of successful operators:
1 Good operations constantly strive to improve.
Do you know how you compare with your peers? Do you know which cows make you money? Successful operators are enrolled in the DHIA program or self-test and compare their performance with other operations. Good producers use this information to cull animals that don’t contribute to the bottom-line.
2 Good operators are good communicators and teachers.
As the size of dairies increase, good employees become a must. Producers who carefully select employees, provide proper training, pay a fair wage, and treat employees like family see the best results. In addition, use employee meetings to keep your employees informed and provide an employee-benefit manual that helps employees understand the advantages of working for your operation.
3 Equity can help you weather any storm.
The most successful operations have an equity position of greater than 70 percent. In other words, the operator “owns” at least 70 percent of the operation, with creditors “owning” 30 percent or less.
4 Keep your current ratio in line.
Strive for a current ratio of 2:1. The current ratio is the ratio of current assets to current liabilities. Current assets include cash, feed inventory, short-term investments, and accounts receivable. Current liabilities are those bills due in the next 12 months. They include accounts payable, operating notes, real estate and income taxes, and the current portion of term debt. If you have a current ratio of 2:1, this means you have $2 of current assets to cover every $1 of current liabilities. A 2:1 ratio should allow you to meet all of your financial obligations. Dairy operations can maintain a lower current ratio than other businesses because they receive revenue in the form of milk checks on a more regular basis.
5 Good financial statements and a plan for the future.
The financial statements your operation needs include a balance sheet, an income statement, and a cash-flow projection for the next year. These tools tell you—as well as your lender—where you are at and where you are going. These statements can be used to answer one of the biggest questions that I hear today: “How long can I survive under these market conditions?”
To estimate your staying power, take a look at your balance sheet. Operations with less than 40 percent equity have a hard time surviving. How much debt can you take on before your equity position deteriorates to 40 percent? Then, take a look at your cash-flow projection. (Note: If you have Excel and access to the Internet, you can download a free cash-flow-planning program by visiting www.farmdoc.uiuc.edu) What is your projected cash loss for the next year? Compare that loss with the debt you could take on to reach 40 percent equity, and you have your answer.
It doesn’t matter if prices improve two years from now. You still need to be in business to take advantage of the higher prices. Your lender may not allow your financial position to reach those levels, so communication is important between you and your lender if your operation is under financial stress.
The glue that holds all of these together is you. Pay attention to details and develop good relationships with your staff and suppliers. This increases your chances of being a successful dairy producer tomorrow.
Darrell Dunteman is an agricultural financial consultant and accountant with offices in Bushnell, Ill.